No. of Recommendations: 2
Shorts - naked or not - have to buy back their shares sooner or later. The best defense against naked shorting is to run a solid company with real earnings so the naked short sellers have to buy back your stock at a higher price than they sold it.

I do not think this is always possible. Let's say a bunch of hedge funds decide to naked short Berkshire Hathaway. Each of 20 of them short 100,000 A shares.

Now, whether or not Berkshire goes up, let us say after 3 days, most of those who bought those naked shares wish to sell, or even if they do not wish to sell, but their brokers insist on delivery of the shares. The hedge funds cannot possibly deliver because they do not have the shares, and furthermore, they cannot buy in because Berkshire has only about 1,500,000 shares outstanding. So somebody is going to lose money. Will the purchasers of the shares, who did no wrong, lose the money? Will the hedge funds -- since no amount of money will enable them to cover the naked shorts? Would Berkshire clean up by issuing some more class A shares at a $1million a piece?

I admit this is a far-fetched situation, but pushing things to the limits often shows the weaknesses of a model.
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